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The Mounting Cost of the NSA Scandal: “Severe and Getting Worse”

The Mounting Cost of the NSA Scandal:

“Severe and Getting Worse”

In the last few weeks, the New American Foundation (NAF) released its report, “Surveillance Costs:The NSA’s Impact on the Economy,Internet Freedom & Cybersecurity,” and Senator Ron Wyden (D-OR) chaired a roundtable with Silicon Valley executives on this very point. Both events highlight what is an increasing problem for U.S. tech companies, as Google’s Eric Schmidt declared the impact of the NSA surveillance revelations was “severe and getting worse.”.

1. Cloud Computing and US Tech Companies

In 2013, tech analyst Rob Enderle predicted that the “National Security Agency will kill the U.S. technology industry single-handedly” as these companies “may be just dealing with the difficulty in meeting our numbers through the end of the decade.”

The NAF report cited studies predicting losses to the U.S. cloud computing industry of $22 to $180 billion over the next three years. In fact, a January 2014 survey of 300 British and Canadian businesses revealed that one-quarter of those sampled were moving their data outside the U.S. and that a greater majority was willing to sacriﬁce performance in order to ensure data protection.

Outside cloud computing major tech companies such as Cisco were seeing a noticeable drop in sales in emerging markets. As John Chambers, CEO of Cisco, recently explained

You look around the world, the emerging markets, I have never seen that fast a move in emerging markets and that is something that when I talk with our industry peers, while there are exceptions, most of my CEO counterparts can almost finish my sentence in terms of what’s occurring.

Increasingly, governments are considering data localization requirements. This is a major issue for Dropbox, for example, which has 70 percent of 300 million customers outside U.S. boarders and approximately 20 countries have pending or are considering data localization requirements. IBM will spend $1 billion to build local data centers in Europe, something Dropbox and others simply cannot afford. Given that some of the countries putting forth such proposals also engage in similar surveillance (e.g., Germany), any such proposal smacks of opportunistic protectionism.

Participants at the Wyden roundtable and others note that the scandal and reaction to it has the potential to “break the Internet” and render it a Balkanized “swamp,void of any real meaning”. Facebook’s General Counsel stressed

the Internet is a medium without borders. The notion that you would have to place data centers and data itself that’s used to serve particular communities and counties within a region is fundamentally at odds with the way the Internet is architected.

2. Political and Foreign Policy Ramifications

The fallout also has undermined the State Department’s “Internet Freedom” agenda and blunted the United States’ ability to isolate China for its ongoing and increasingly aggressive campaign of cyber attacks.. While in Washington, it has stalled efforts at establishing minimum cyber security standards.

Brazil responded by putting on hold and ultimately cancelling a proposed $4 billion purchase of aircraft from U.S. based Boeing, while organizing a global internet stakeholder conference to renew the debate over global internet governance and U.S. influence. It is believed that the Obama administration accelerated the announcement of the proposed transfer of US authority over ICANN to a multi-stakeholder international entity.

In Europe, the NSA scandal has put the continuation of the US-EU Safe Harbor Agreement into jeopardy.

3. We Are Not Done Yet

The worst bit of news for U.S. tech companies may be that we are not done yet with revelations from Snowden, as a new round is expected to reveal that the NSA engages in economic espionage with our allies which may trigger even further backlash.